Russia’s war to keep hitting EU economy, push up inflation

The summer figures for the 19-nation eurozone set inflation to reach an average of 7.6% this year, a major increase from its earlier expectation of 6.1%. Last month, consumer prices surged 8.6% from a year earlier. Expectations for economic growth slid by 0.1 point to 2.6% for the year, a big drop from last year’s expansion of 5.3%.

“Russia’s war against Ukraine continues to cast a long shadow over Europe and our economy,” said EU Vice President Valdis Dombrovskis.

The war has led to surging energy and food prices that are driving a galloping inflation rate and weighing on economic growth and consumer confidence. Fears are rising that the energy crisis could get worse if Russia further reduces natural gas supplies or turns off the taps completely as European countries scramble to refill their reserves in preparation for winter.

The EU acknowledged that Russian President Vladimir Putin can keep the European economy off balance for months to come and make any forecast highly uncertain.

“Risks to the forecast for economic activity and inflation are heavily dependent on the evolution of the war and in particular its implications for gas supply to Europe,” an EU statement said.

Higher energy prices and record inflation are largely to blame for another tough economic sign: the euro hovering near parity with the dollar after dropping to its lowest level in 20 years.

To make matters even worse, a recent surge in COVID-19 cases is causing new jitters.

“The possibility that the resurging pandemic in the EU brings renewed disruptions to the economy cannot be excluded,” the statement said.

Economy Commissioner Paolo Gentiloni said that “with the course of the war and the reliability of gas supplies unknown, this forecast is subject to high uncertainty and downside risks.”

The volatility though, could also tilt the other way, with a possibility that commodity and energy prices could decline at a faster pace than is now foreshadowed.

After the dark forecast for this year, eurozone inflation is set to rise 4% in 2023, still a huge increase over the spring forecast 2.7%.

All this stands in sharp contrast from a year ago, when the EU was bouncing back from the pandemic and was ready for prosperous times again.

The eurozone nations will have to contend with higher borrowing costs as the European Central Bank is set to raise interest rates next week for the first time in 11 years to counter runaway price increases.

Energy poses a major challenge for the EU, which for years has relied heavily on Russian oil, natural gas and coal to help power cars, factories, heating systems and electricity plants.

And even if the EU has imposed sanctions and issued plans to phase out coal and oil from Russia, it still remains heavily dependent specifically on natural gas.

European Commission chief Ursula von der Leyen said last week that the bloc needs to make emergency plans to prepare for a complete cutoff of Russian gas. If it materializes, it could have a major impact on the overall economy.